Scottish Sales Review 2022
As we approach the latter part of the year, our analysis of the Scottish housing market has highlighted a reasonably strong market at the mid-year point with no significant downturn expected by the end of 2022.
Our analysis not only showed the significant impacts of the Covid-19 pandemic but also illustrated how the market has recovered after a collapse following lockdown in Spring 2020.
The events of these past two years have not only had the short-term impact of igniting the most active period in the Scottish housing market since the years preceding the Global Financial Crisis, but have also led to fundamental and lasting changes in the market.
WFH boosts rural sales
The average house price in Scotland in 2022 is now over £200,000, having risen 13% since 2019.
Premium for detached homes
The growth in the average price of a detached house from 2019 to 2022 has been highest in rural locations.
Demand Outstrips Supply
Demand is currently up 60% on pre-pandemic levels compared to supply at 25%.
TWO UNEXPECTEDLY STRONG YEARS
The market has had a strong two years following the start of the pandemic, which has caused some fundamental market changes.
Rural areas have benefited most from the upsurge in demand due to the increased ability to work from home, while people have also been seeking larger properties with more outdoor space in more affordable areas. This is evident when we see the areas with the highest growth in sales and average prices since 2019: Aberdeenshire (up 38%), Scottish Borders (up 24%) and Perth & Kinross (up 22%) – and in average prices – Inverclyde (up 44%), Scottish Borders (up 39%) and Argyll & Bute (up 30%).
IT’S NOT ALL DOOM AND GLOOM
Negative predictions of housing market crashes usually accompany negative economic news. However, despite the current challenges, the market remains in a state of excess demand relative to supply, which is supporting price growth.
As a result, average prices in Scotland grew by 5% during the first half of 2022.
OUR RETTIE & CO. FORECAST
We do expect a slowdown as the cost-of-living crisis bites, with interest rates expected to continue their upwards drift. However, the country’s housing market has not been experiencing the levels of activity and price growth we saw preceding the 2008 Global Financial Crisis. Crashes usually need to be preceded by booms and, outside the last two years, the market has not experienced significant price or sales growth.
We are forecasting house price growth of 2.5% over 2022 as a whole, 1% growth in 2023, followed by trend growth over 2024-26 of around 3-5% per annum if Bank of England expectations on economic growth are correct.
Your Questions Answered
We saw that the greatest growth in activity in 2021 compared to 2019 was in rural areas such as Aberdeenshire (38%), the Scottish Borders (24%) and Perth & Kinross (22%). This compares to Edinburgh (15%) and Glasgow (14%), for example.
Compared to other parts of the UK, home working has been more keenly embraced in Scotland. In fact, home working increased by over 200% in Scotland during the pandemic.
It’s important to bear in mind that while interest rates and the cost of borrowing are rising, they remain at historically low levels compared to the period preceding the Global Financial Crisis. In the mid-1990s rates were over 8% and, in the run up to the financial crisis, they were over 5%. Tighter regulation of the mortgage market, although since somewhat relaxed, has removed many of the questionable lending practices that led to the 2008 crisis.
Although there has been an upsurge in demand for rural living, which, over the last 3 years, has led to a high level of average price growth in places such as the Scottish Borders (39%), Argyll & Bute (30%) and Dumfries & Galloway (27%), the demand for urban living remains strong. For example, over the same time period, average prices have increased by 27% in Glasgow and 13% in Edinburgh. Urban living remains particularly popular with younger people, who desire to be nearer places of work and amenity, and the rise of the Build to Rent (BTR) sector will provide high amenity urban living for this demographic, with over 13,000 BTR units now operating, under construction or in planning in Scotland, predominantly in Edinburgh and Glasgow.
The UK Government’s recent announcement of the cap on energy prices will be welcome, although it is still a significant increase on energy bills from last year. Nevertheless, it should mean that people will have greater affordability to purchase and keep up with their mortgage and rent payments to a better extent than they would have without the cap. However, the cost of living crisis has a number of moving parts and the most significant concern to the property market is rising interest rates, which will feed through into mortgage rates and will likely depress the market for a time.
The paucity of data on the private rental sector (PRS) in Scotland makes it difficult to answer this question. It does appear though that the market peaked a few years ago, when, according to the Scottish Government’s Scottish Household Survey, there were 370,000 households in the PRS in 2016. Tax and legislative reform saw this number drop to 340,000 in the latest figures from 2019 and these numbers are expected to fall further in 2020-22 - monthly letting listings are on a clear downward trend in Scotland over the 2020-22 period. Some of these properties have been sold as landlords have decided to exit the sector and benefit from the strong sales market. However, other properties will have been purchased by other landlords or moved to the short-term let sector, which is now under a regulatory regime that may see properties exit this market after an influx into it from 2014. Some owners may also choose to have their properties as second homes and enjoy the capital growth without having to be concerned about the future direction of legislation in Scotland, although this means foregoing an income return.
In recent years, first time buyers have benefited from relatively low mortgage rates; less competition from the buy-to-let sector; government programmes such as Help to Buy; increased exemption from property transaction tax; and enhanced savings after the Covid period that enabled them to put down higher deposits. According to Lloyds Banking Group, Scottish first time buyer numbers increased by 24% in 2021. However, the first-time buyer market is going to come under increasing pressure with rising interest rates and the likely decrease in mortgage products. This will affect the affordability and availability of lending. The UK Government has increased the Stamp Duty threshold on first time house purchases to £425,000 in England. In Scotland, this is currently £175,000 (on Scotland’s Stamp Duty equivalent, LBTT), but the Scottish Government may choose to increase this as a response to the rise in England.
We are already seeing some early effects. The new administration’s tax cutting budget at a time of high inflation has been widely seen by many commentators, including the International Monetary Fund (IMF), as a serious mistake. The UK Government argues that, in time, these measures will boost the economy and improve earnings, making housing more affordable. In the short-term, the main effects seem to be rising interest rates and the withdrawal of mortgage products. Nearly 40% of the Scottish housing market is cash purchases and higher risk lending is at a much lower level now (at around 4% of total residential lending) than it was in 2008 (10% of total residential lending). These should act as shock absorbers in the market, but it is likely that we will see, over the next few months, a tightening of the mortgage market, which will impact on transactions and quite possibly house prices too.